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Putin stirs Ukraine with proposed gas merger

Russian Prime Minister Vladimir Putin made an impromptu offer Friday to merge gas powerhouse Gazprom with Ukraine's state energy company Naftogaz. Ukraine's opposition labeled the proposal an attempt to rob the country of its independence.

Since the election in February of Kremlin ally Viktor Yanukovich as Ukraine's president, ties with Moscow have rapidly improved with accords on gas pricing and a lease extension for a key Russian naval base in Ukraine's Crimea.

But Prime Minister Vladimir Putin's proposal was Russia's boldest move yet and would allow Moscow to control its gas transit to Europe. Ukraine's opposition leader Yulia Tymoshenko said the deal was part of "a plan to destroy Ukraine".
"It is not a merger based on partnership but Russia's full acquisition of Ukraine," Tymoshenko said in a statement posted on her party's website. "The Crimea was just the beginning."

The deal would at a stroke give Moscow control of the major gas pipelines which run through Ukraine to supply Europe, as well as a lockhold over Ukrainian domestic gas supplies.

Owned by the state, Naftogaz is the exclusive importer of Russian gas into Ukraine and about 20 percent of the EU's gas needs flow through its pipelines.

Naftogaz's finances have crumbled as it buys gas from Russia at expensive prices and is then forced to sell it at subsidised prices to Ukrainian consumers.

The Gazprom-Naftogaz merger proposal came at a meeting in Russia's Black Sea resort of Sochi of the Russia-Ukraine inter-governmental commission.
Nuclear cooperation

The head of Russia's state nuclear corporation, Sergei Kiriyenko, had earlier said both countries were considering creating a joint venture to implement nuclear power projects.

"We spoke about integration in the nuclear sphere. We are ready to do the same in gas. I propose to merge Gazprom and Naftogaz of Ukraine," Putin told the meeting.

A spokesman for Ukraine's premier described Putin's comments as "impromptu", Interfax reported, but gas industry sources said the proposal was serious and not an off-the-cuff remark.

"Ukraine's Prime Minister Mykola Azarov states that the idea to merge (Naftogaz) and Gazprom was not discussed and not even raised (at the meeting)," Interfax Ukraine quoted spokesman Vitaly Lukyanenko as saying.

"The idea expressed by the Russian prime minister was impromptu. So, we will discuss impromptu proposals and look into concrete proposals," he said.

Putin's spokesman Dmitry Peskov told Reuters the deal would most likely take form of an equity swap between the two firms, with Ukraine possibly exchanging its 100 percent holding in Naftogaz for a corresponding stake in Gazprom.
"We are talking about a creation of a single company," Peskov said, dismissing talk that the proposal was "impromptu".

"It (the proposal) was not an impromptu one. It was a thought-out, calculated proposal. Such proposals are not made in an impromptu way," Peskov said. He added that Russia's plans to diversify gas supplies to Europe remained on track.
Gazprom spokesman Sergei Kupriyanov told Reuters Putin's offer was "interesting" and Gazprom was ready "to work on it".

"Obviously, the synergy effect is there, we will see how it is implemented", he said. Gazprom shares fell 2.5 percent to 170 roubles after the news, and some analysts were sceptical.

Chris Weafer, chief strategist at Russian brokerage Uralsib, said it would be "an impossible merger".

"I think that the two companies are different animals in terms of size and transparency," he said. "I don't think that Ukraine would agree to a merger."
Medley Global Advisors' analyst Douglas Busvine said valuing Naftogaz, which is not a public company, does not disclose its financials and had restructured its debt last year, would be difficult.

"Naftogaz is not viable as a going concern but they have some assets that are worth something," he said. Peskov suggested that as Russia diversifies its supplies routes the value of Naftogaz assets is set to decrease. Weafer said Gazprom's size meant it would completely dominate any joint company. "And that would be unacceptable to the Ukrainian public," he added.

The fiery opposition leader Tymoshenko called for the creation of a "committee to save Ukraine". She called for mass protest rallies starting May 11 to depose Yanukovich.

Gazprom's CEO Alexei Miller said the firm was ready to consider an asset swap with Naftogaz in business segments ranging from exploration to sales. "In reality, that's the question of a merger of the two companies," he said.